How logistics can help win the e-commerce race in the Middle East

The e-commerce sector in the Gulf Cooperation Council (GCC) is a hotbed of strategic activity. That is no surprise with mergers and acquisitions, inflow of major funds, restructuring, consolidation, and the entry of foreign players continuing to shape the Middle East.

For a region that has been dependent predominantly on oil and petroleum as key business drivers, e-commerce is fast becoming the new battleground for growth across the Middle East. A shift in consumer buying behaviours coupled with the need for strong, reliable logistics expertise are likely to play a key role in the success of e-commerce in the region. In this blog, I will look at these influences, starting with the most important one of all. Growth!

A recent report by AT Kearney suggests that e-commerce growth in the GCC could be valued at up to USD $20 billion by 2020. That represents an increase of more than USD $15 billion, compared with 2015. Having said that, the sector still only contributes a mere 0.4% to the total GDP; an unusually low figure when compared to countries with similar GDP per capita and internet penetration. But this has not put off investments. Everybody wants a piece of the e-commerce action in the Middle East market, and with good reason.

In Dubai alone, E-commerce accounts for 10% of the country’s total retail trade. Across the region, and specifically Dubai, e-commerce is also expected to get a major boost from the Dubai Expo scheduled to take place in 2020.

Traditionally, increases in smartphone usage, internet penetration and plastic money have all been the driving force behind e-commerce growth in developed economies such as the UK and the US. A similar trend is now being observed in the Middle East. Unsurprisingly, the last decade has seen the region’s e-commerce sector grow by approximately a whopping 1500%. But there are several additional influences which are helping to shape the e-commerce landscape across the region.

Buying trends and consumer behavior

A structural shift in consumer buying patterns is resulting in a notable shift towards online platforms over traditional brick-and-mortar stores and that is also acting as a catalyst for growth in the e-commerce sector. For e-commerce to truly take off in the region however, there are several obstacles that need to be addressed.

Cash versus plastic

Cash continues to be the major mode of payment in the region and is used in more than half of all transactions in the UAE. This may in part be due to less than satisfactory experiences of using cashless options, such as mobile apps, cards, and point of sale (POS) terminals. However, the use of credit and debit cards is on the rise. In fact, more than half of all respondents in a recent AT Kearney survey claimed they were dissatisfied with cash as a payment option.

Added to this is an ongoing dissatisfaction with the existing online marketplace, low inventory, inefficient distribution channels, along with uninspiring deals and promotions. This is compounded by the fact that traditional brick-and-mortar shops historically have enjoyed more focus, and even cult-like status in the UAE, with Dubai viewed as an international shopping destination.

As a result, the existing logistics infrastructure is heavily skewed towards offline retail, with new businesses looking to set up shop in the UAE typically following a franchise model and tying up with a local partner to encourage indigenous growth. Franchised businesses now contribute nearly USD $30 billion a year to the retail sector which itself continues to grow at an annual rate of CAGR 27%.

The rise of e-commerce

The combination of increasing smartphone use, a young demography with high disposable income, high internet penetration and friendly state policies is expected to further drive e-commerce in the region.

E-tailers have also begun to invest in developing the infrastructure to overcome local challenges. Amazon’s interest in the Middle East would seem to confirm the potential for e-commerce in the region following their acquisition of Dubai-based Souq.com, the reigning market-leader. Other emerging ventures such as Noon.com – backed by USD $1 billion of capital from Saudi Arabia’s Public Investment Fund and Dubai real estate tycoon Mohamed Alabbar – are also vying to shape the regional e-commerce market. Alabbar has since acquired a majority stake in Dubai-based online fashion retailer, Namshi to further leverage the growing e-commerce market.

Logistics – A key factors for e-commerce success

The key factors for success in the Middle East differ vastly across geographies.

Currently, the GCC region is dominated by brick and mortar retailers. CBRE’s 2016, ‘How Global is the Business of Retail?’ report noted, for example, that Dubai ranks third amongst the top target markets for new retailershaving welcomed 59 new brands in 2016, 32% of which were specialist retailers. This presents e-commerce companies with an interesting opportunity to explore omnichannel selling.

However, even with a strong online presence, secure payments system and an ability to understand consumer preferences, the success of omni-channel will still depend heavily on the availability of robust supply chains, logistics, and last-mile delivery infrastructure.

In the face of competition and operational excellence from overseas e-tailers, local e-commerce companies will be pressed to build and leverage partnerships with globally experienced logistics service providers who can help them streamline their processes to make online shopping a truly hassle-free and world-class experience. And, there is little doubt that consumers can and will benefit from an effective online marketplace and enhanced buying experience.

A streamlined logistics and supply chain network can lend businesses a competitive and operational edge particularly in influencing customers’ overall satisfaction with the seller and overall e-commerce experience. We foresee that retailers in the GCC will be looking to benefit from an omni-channel approach, that provides high quality customer experiences, backed by technology-driven automation and strong connections with logistics providers.

Connect with us, to find out more about the latest e-commerce developments and Damco solutions to help your business stay ahead.

Nirmal Thakkar works in Supply Chain Development for Damco and is currently based in Dubai, UAE. With more than 12 years’ experience in the global logistics industry (primarily in the United States), Nirmal has held a number of roles within Damco with most recent in supply chain solutions arena and prior to that, with other companies spanning continuous business improvement, freight forwarding and automotive logistics.

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